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Ethanol faces showdown Tuesday

Ethanol lobbyists and farm groups are urging members of the U.S. Senate to vote against an amendment that Senator Tom Coburn (R-OK) is expected to offer Tuesday that would end the 45 cent-a-gallon blenders credit for ethanol almost immediately--by July 1.

Instead, many groups are circling the wagons around a new bill introduced Monday by a bipartisan group of senators led by Amy Klobuchar (D-MN) and John Thune (R-SD).

The bill, called the Ethanol Reform and Deficit Reduction Act, switches the ethanol tax credit on July 1 to a variable rate subsidy that wouldn't kick in until oil prices fall below $90 a barrel. Think of it as swapping direct payments on your corn ground for counter-cyclical payments.

Under the Thune-Klobuchar plan, the tax credits to companies blending ethanol into gasoline would be modest, just 6 cents a gallon when light sweet crude on the New York Mercantile Exchange falls below $90 a barrel for three months. For each $10 drop in oil futures prices, the tax subsidy rises in 6-cent increments, until it hits a maximum of 30 cents a gallon when prices are $50 a barrel or less.

This is switch from a bill offered in May by Senators Chuck Grassley (R-IA) and Kent Conrad (D-SD) that would have given ethanol blenders a fixed tax credit for two more years (20 cents the first year and 15 cents the next) before switching to a variable tax credit.

But, as the National Corn Growers Association explained Monday, "due to increasing budget concerns, the ethanol industry and this bipartisan group of senators felt the need to review potential savings of moving towards reform immediately."

The new variable rate tax credit would also fall by 2 cents each year after 2011, ending in 2014.

The bill would free up $2.5 billion, NCGA said, with $1 billion going to deficit reduction and the rest to supporting blender pumps and ways to improve market access for ethanol.

“The Ethanol Reform and Deficit Reduction Act comes at a time when we are proactively trying to reform the ethanol industry, unlike the oil and gas industry,” said NCGA president, Bart Schott of Kulm, North Dakota.

Fiscal conservative Lugar has been pushing to switch to a variable tax credit since 2006.

“It is past time for the next phase of innovation. I am delighted that more colleagues are now willing to join in reform efforts," Lugar said in a statement Monday. "I commend Senator Thune for spearheading this bill.”

The Thune-Klobuchar bill also has the support of the ethanol lobbying group, Growth Energy.

CEO Tom Buis said, “Sens. Thune and Klobuchar are proposing a fiscally-responsible bill that reforms ethanol tax policy in a manner that creates U.S. jobs, gives American motorists a choice at the pump, reduces our nation’s dependence on foreign oil and encourages the development of ethanol from next-generation feedstocks, such as cellulosic biomass."

Part of the money saved by ending the 45 cent tax credit for ethanol would also extend the current $1.01 a gallon subsidy for cellulosic ethanol, which makes up a tiny fraction of ethanol sold in today's market.

Ethanol groups have had trouble getting behind one legislative approach to countering critics of the 45 cent tax credit. But a broad coaliltion opposes Coburn's plan to simply end the tax credit.

In a letter to leaders of the Senate opposing Coburn's efforts, NCGA and Growth were joined by American Farm Bureau Federation, National Farmers Union, American Coalition for Ethanol, Advanced Ethanol Coalition, and the Renewable Fuels Association.

The letter to Majority Leader Harry Reid and Minority Leader Mitch McConnell, says, "we write to urge you to oppose Amendment No. 436 to the Economic Development Revitalization Act (EDA) of 2011 (S.782) offered by Senator Tom Coburn of Oklahoma, and Amendment No. 411 offered by Senator John McCain of Arizona. The amendments would immediately and retroactively end the existing blender’s credit and secondary tariff for ethanol, and prohibit the use of U.S. Department of Agriculture funds for the construction of an ethanol blender pump or ethanol storage facility, respectfully."

Grassley said Tuesday morning that he thinks ethanol supporters would likely lose the vote on Coburn’s amendment (which he expects to come up Tuesday afternoon) if Democrats opposed to the ethanol tax credit voted on the issue alone.

But he said some Democrats are likely to be against the procedural vote to break a filibuster, which requires the support of 60 senators. Coburn is bucking the leadership of the Senate with his amendment.

Grassley said that the key difference between his earlier bill to phase out the ethanol tax credit and Monday’s bill offered by Klobuchar and Thune is that it offers an immediate savings of $1 billion from federal spending. Coburn has said his bill to end the ethanol blenders credit would save $2 billion to $3 billion in federal spending.

“We wanted to offset his argument a little bit,” Grassley said.

Grassley was asked if he thought the most likely outcome of the wrangling over ethanol subsidies would be gridlock in Congress, with Coburn’s amendment not passing but the ethanol reform bills not passing either. No action by Congress would mean the current 45 cent-a-gallon tax credit will expire at the end of this year. (And oil industry tax credits would continue.)

Grassley said that if issues related to the ethanol tax credit, such as the Thune-Klobuchar bill, are attached to the Economic Development Revitalization Act, it would turn the bill into a tax bill, which the House wouldn’t accept. Under the Constitution, tax legislation is supposed to originate in the House.

But, Grassley said, supporters of the Ethanol Reform bill still have about six months to work for support in Congress.

Tuesday the Renewable Fuels Association said the group “remains cautiously optimistic that Sen. Coburn’s efforts will not be successful.”

RFA points out the gasoline retailers who have already contracted to buy ethanol this year don’t want the tax credit phased out before December 31 and that Coburn’s amendment is opposed by the Petroleum Marketers Association of America and the Society of Independent Gasoline Marketers of America.

RFA also put out a statement Monday praising the introduction of the Thune-Klobuchar bill.